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Assessing Rational Expectations 2: "Eductive" Stability in Economics

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Author Info

  • Roger Guesnerie

    ()
    (Collège de France)

Abstract

The rational expectations hypothesis (REH) dominates economic modeling in areas ranging from monetary theory, macroeconomics, and general equilibrium to finance. In this book, Roger Guesnerie continues the critical analysis of the REH begun in his Assessing Rational Expectations: Sunspot Multiplicity and Economic Fluctuations, which dealt with the questions raised by multiplicity and its implications for a theory of endogenous fluctuations. This second volume emphasizes "eductive" learning: relying on careful reasoning, agents must deduce what other agents guess, a process that differs from the standard evolutionary learning experience in which agents make decisions about the future based on past experiences. A broad "eductive" stability test is proposed that includes common knowledge and results in a unique "rationalizable expectations equilibrium." This test provides the basis for Guesnerie's theoretical assessment of the plausibility of the REH's expectational coordination, emphasizing, for different categories of economic models, conditions for the REH's success or failure. Guesnerie begins by presenting the concepts and methods of the eductive stability analysis in selected partial equilibrium models. He then explores to what extent general equilibrium strategic complementarities interfere with partial equilibrium considerations in the formation of stable expectations. Guesnerie next examines two issues relating to eductive stability in financial market models, speculation and asymmetric price information. The dynamic settings of an infinite horizon model are then taken up, and particular standard and generalized saddle-path solutions are scrutinized. Guesnerie concludes with a review of general questions and some "cautious" remarks on the policy implications of his analysis.

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Bibliographic Info

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This book is provided by The MIT Press in its series MIT Press Books with number 0262072580 and published in 2005.

Volume: 1
Edition: 1
ISBN: 0-262-07258-0
Handle: RePEc:mtp:titles:0262072580

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Web page: http://mitpress.mit.edu

Related research

Keywords: eductive stability; rational expectations; market models;

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Cited by:
  1. Michael Woodford, 2013. "Macroeconomic Analysis without the Rational Expectations Hypothesis," NBER Working Papers 19368, National Bureau of Economic Research, Inc.
  2. Michael Woodford, 2012. "Principled Policymaking in an Uncertain World," INET Research Notes 10, Institute for New Economic Thinking (INET).
  3. Branch, William & Evans, George W & McGough, Bruce, 2012. "Finite Horizon Learning," SIRE Discussion Papers 2012-16, Scottish Institute for Research in Economics (SIRE).
  4. Maik Heinemann, 2007. "E–stability and stability of adaptive learning in models with asymmetric information," Working Paper Series in Economics 69, University of Lüneburg, Institute of Economics.
  5. Roman Frydman & Edmund S. Phelps, 2013. "Which Way Forward for Macroeconomics and Policy Analysis?
    [Rethinking Expectations: The Way Forward for Macroeconomics]
    ," Introductory Chapters, Princeton University Press.
  6. John C. Driscoll & Steinar Holden, 2014. "Behavioral Economics and Macroeconomic Models," CESifo Working Paper Series 4785, CESifo Group Munich.
  7. Ben-Porath, Elchanan & Heifetz, Aviad, 2011. "Common knowledge of rationality and market clearing in economies with asymmetric information," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2608-2626.
  8. repec:hal:wpaper:halshs-00586749 is not listed on IDEAS
  9. repec:spo:wpecon:info:hdl:2441/f4rshpf3v1umfa09lat09b1bg is not listed on IDEAS
  10. Ghosal, Sayantan, 2006. "Intertemporal coordination in two-period markets," Journal of Mathematical Economics, Elsevier, vol. 43(1), pages 11-35, December.
  11. Gaetano Gaballo, 2008. "Interactive Learning and Behavioral Sunspots," Department of Economic Policy, Finance and Development (DEPFID) University of Siena 1008, Department of Economic Policy, Finance and Development (DEPFID), University of Siena.
  12. repec:hal:wpaper:halshs-00590856 is not listed on IDEAS
  13. Paul Hubert, 2010. "Monetary Policy, Imperfect Information and the Expectations Channel," Sciences Po publications info:hdl:2441/f4rshpf3v1u, Sciences Po.
  14. Massimo Cingolani, 2008. "Full Employment as a Possible Objective for EU Policy I. A Perspective From the Point of View of The Monetary Circuit," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 55(1), pages 89-114, March.
  15. Massimo Cingolani, 2010. "PPP Financing in the Road Sector: A Disequilibrium Analysis Based on the Monetary Circuit," Transition Studies Review, Springer, vol. 17(3), pages 513-550, September.

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